TYPES OF BUSINESS ORGANIZATION [ 5.2 ] Partnerships and Franchises

Learning Objectives Explain the characteristics of different types of partnerships. Analyze the advantages of partnerships. Analyze the disadvantages of partnerships. Describe how a business franchise operates. partnership general partnership. limited partnership, limited liability partnership articles of partnership, assets, business franchise royalties. Key Terms

Unlike a sole proprietorship, a partnership is a business owned and operated by two or more people.

Three TYPES of Partnerships General Partnership Limited Partnership Limited Liability Partnerships

The Characteristics of Partnerships Compare and Contrast How do limited liability partnerships differ from the other two types of partnerships?

General Partnership The most common type of partnership is a general partnership. In a general partnership, all partners share equally in responsibility and liability. In a general partnership, all partners are responsible for the business.

If you form a general partnership, your partner’s actions directly affect you.

E. Napp Limited Partnership Another type of partnership is a limited partnership. In a limited partnership, one partner must be a general partner or responsible and liable for the business. The other partners are limited partners.

E. Napp The limited partner only contributes money and has limited liability.

E. Napp Limited Liability Partnership Only some individuals are allowed to form such partnerships. Doctors, lawyers, and accountants are allowed to form limited liability partnerships. In these partnerships, liability is limited.

E. Napp In limited liability partnerships (LLPs), each partner is a limited partner and only responsible for his own actions.

E. Napp In a limited partnership, one partner must be fully liable and responsible.

E. Napp Liability It is important to remember that liability is the legal obligation to pay all debts. In the three different forms of partnerships, liability differs. The varying degrees of liability determine the various types of partnerships.

The Characteristics of Partnerships The table shows how the same business loss might be shared by partners in three different partnerships. Synthesize Why does the personal liability of the partners differ in these scenarios?

Advantages of Partnerships Ease of Start-Up Financial Impact Shared Decision Making Few government regulations. Setting up articles of partnership with an attorney helps partners define how their business will be managed. The articles of partnership may also clarify how disagreements will be resolved.

Disadvantages of Partnerships Limited liability partnerships have fewer disadvantages than partnerships with general partners. All partnerships, however, have the potential for conflict. Unlimited Liability Potential for Conflict Lack of Permanence When a partnership goes out of business, general partners are fully liable for all the business’s debts. The liability of limited partners extends only to their initial investment.

Disadvantages of Partnerships Make Decisions What do the partners in this business gain by taking on a new partner? What do they give up?

The Franchise Alternative Sole proprietorships can suffer from a lack of resources or the lack of skills on the part of the owner. Some people solve these problems by forming partnerships. Others choose another form of business—a franchise. A franchise is a semi-independent business. The owner of a franchise pays a fee to a parent company in exchange for the right to sell the parent company’s products. The owner of the franchise must conform to the parent company’s rules. Franchise

The Franchise Alternative UPS Stores, which handle mailing, shipping, and business services, are just one example of a franchise.

E. Napp Many familiar restaurants are franchises.

The Franchise Alternative Analyze Information Which aspect of franchising might be helpful for a relatively inexperienced entrepreneur?

E. Napp Nonprofit Organization A nonprofit organization is a business that does not operate for profits. Nonprofit organizations serve society. The American Red Cross is an example of a nonprofit organization.

E. Napp The American Red Cross is a nonprofit organization.

E. Napp Nonprofit organizations serve society.

Nonprofits Nonprofit hospitals like this one seek to make money. They invest some of that profit in new technology and expansion, but much of it goes to charity care and community health programs.

The Franchise Alternative The chart compares profits when the same revenue is earned by three types of businesses. Analyze Charts Why does the franchise owner have less profit than the sole proprietor?

Quiz: The Characteristics of Partnerships Which of these is an advantage that general partners alone enjoy in a limited partnership? A. control of business operations B. limited liability C. share of investment D. share of profits

Quiz: Advantages of Partnerships What is an advantage that the general partners who own a partnership have that the owner of a sole proprietorship may not have? A. no need to follow government regulations B. better access to capital C. ease of start-up D. no need to hire employees

Quiz: Disadvantages of Partnerships Suppose a business is owned by two partners. What skill does each partner need that a sole proprietor would not necessarily need? A. decision-making ability B. management expertise C. ability to collaborate with an equal D. advertising expertise

Quiz: The Franchise Alternative What is an advantage of being a franchisee? A. brand recognition B. control over products sold to customers C. franchising fees D. royalty payments